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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM

 

SingTel - Cautious Near-term Outlook, Downside Supported by Attractive Dividend Yield

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  • SINGTEL (SGX:Z74) will defend its market leadership position in the consumer space while driving high single-digit EBITDA growth for FY20. The overhang from TPG appears fairly muted at this stage given incumbents’ grip on premium customers and the proliferation of MVNOs to address value customers.
  • All in all, we foresee a 9% y-o-y earnings contraction for FY20, given competition in the consumer space and weak enterprise revenue.
  • Maintain HOLD with a target price of S$3.32. Entry price: S$3.00.

What’s New

FY20 outlook: Cautiously optimistic.

  • SINGTEL (SGX:Z74) will focus on:
    1. defending its market share in both Singapore and Australia,
    2. driving digital businesses, and
    3. keeping a tight lid on cost structure via the digitisation of its traditional operating model.
  • All in all, SingTel guided for mid-single-digit revenue growth and high-single-digit EBITDA growth for FY20.

Defending leadership in Singapore amid intense competitive pressure…

  • Broadly, SingTel aims to defend its subscriber market share of 49.5% in Singapore consumers.
  • To recap, SingTel added 35,000 post-paid subscribers in 1QFY20 with the inclusion of GOMO’s SIM-only offering. That said, post-paid ARPU declined 13% y-o-y to S$40/month in 1QFY20 as a result declining voice, roaming usage and entry of SIM-only post-paid plans from mobile virtual network operators (MVNO).
  • For the rest of FY20, we have factored in a 12% y-o-y decline in ARPUs to S$36/month by 4QFY20.

...with entry of another 1-2 MVNOs in the near term.

  • In essence, we expect competition to remain intense in Singapore with the potential entry of another 1-2 MVNOs in the near term.
  • The recent Circles.Life’s “S$5 for 2GB” plan – on the surface suggests bite-sized offerings but our recent meetings with telcos seem to suggest that prices have stabilised in Singapore at around the S$18-20/ month range without massive data discounting practices. Instead, telcos are finding niche opportunities like bite-sized offerings for low data users and segmented target packages.

TPG losing grip with entry of MVNOs.

  • Separately, we note that TPG remains on track to deliver its coverage milestone having spent A$147m (S$139m) in aggregate capex for Singapore’s roll-out (vs planned capex of A$200-300m). It currently has 300,000 subscribers on its free SIM plan.
  • Given incumbents’ grip on premium customers and the proliferation of MVNOs in Singapore, it will make it difficult for TPG to gain significant leverage in the SIM-only segment.

Stock Impact

Healthy dividend yield of 5.6% for FY20.

  • Barring unforeseen circumstances, management intends to maintain ordinary dividends at 17.5 S cents for FY20, and thereafter revert back to paying 60-75% of underlying net profit. This translates to a net dividend yield of 5.6% for FY20.

5G roadmap and spectrum allocation by end-19…

  • The Infocomm Media Development Authority (IMDA) has called for proposals on the deployment of standalone (new) 5G network for Singapore. A total of 64 submissions were made by telcos and consumers to the IMDA. At this juncture, the IMDA is in the midst of closed door consultations with telcos to facilitate the commencement of 5G roll-out from 2020 onwards.
  • We expect the IMDA to allocate 5G spectrum by end-19.

…as regulator focuses on network reliability.

  • Due to current scarce spectrum resources, the IMDA is proposing a two-network 5G framework to hold the 3.5 GHz, 26 GHz and 28 GHz (mmWave) bandwidths. We believe the two network players will include:
    1. SingTel, and
    2. a consortium of multiple service providers like StarHub (SGX:CC3)/M1 and fibre network provider, ie NetLink Trust (SGX:CJLU).
  • Potential capex may be in the region of S$1-2b as the IMDA aims for 50% coverage within 24 months from the commencement of the 3.5 GHz spectrum rights. Assuming a capex budget of S$1b-2b per 5G network operator, SingTel may have to raise capital as its current net debt-to-EBITDA and share of associate net profit is just slightly under 2x (1.92x as at 30 Jun 19).

Earnings Revision / Risk

  • FY20 net profit to contract by 9% y-o-y on the back of:
    1. 3% y-o-y decline expected for enterprise segment revenue; and
    2. heightened competition in Singapore and Australia consumer segment.
  • The weaker enterprise revenue base is due to:
    1. renegotiation of public contracts in Singapore; and
    2. weak enterprise business in Australia, especially in the financial sector due to regulatory changes.
  • The Australian banks are pouring resources into beefing up compliance vs traditional IT capabilities. This has resulted in a structural decline in Optus’ enterprise business.
  • All in all, we project a modest three-year net profit CAGR of 6% in FY19-22, underpinned by recovery in Airtel in the next 3 years.

Outlook for Key Divisions

Singtel (Singapore)

  • Consumer – price stability expected in 2HFY20, no more massive price discounting.
  • Enterprise business – Contract renewal to lead to margin erosion in FY20.

Optus (Australia)

  • Good post-paid subscriber momentum.
  • Focus on successful monetization of data growth given good network coverage.
  • Enterprise business to remain weak into the year – structural weakness in financial sector.

Telkomsel (Indonesia)

  • Expects 20% y-o-y net profit growth (1H19: 27% y-o-y) with a stable dividend payout ratio of 90% in 2019, underpinned by
    1. robust data traffic growth, and
    2. superior network quality and a broader coverage.

AIS (Thailand)

  • Guidance: revenue to grow mid-single digit and EBITDA margin stable at 43%.

Bharti Airtel (India)

  • Expects market to continue experimenting with price points in the prepaid market. Bharti currently has 15-20% of prepaid market.

Globe (Philippines)

  • Competition is rational and market has stabilised. Good time to monetise data growth.

Potentially lower subsidy for iPhone plans, higher equipment sale in 3QFY20.

  • SingTel has officially launched its new mobile plans for iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max. We expect 3QFY20 to see higher equipment sales thanks to the launch, potentially drive higher earnings for 3QFY20.
  • Importantly, we note that the subsidy levels have been reduced vs last year’s iPhone X pricing plans.

Valuation / Recommendation

Maintain HOLD with a target price of S$3.32.

  • Our fair value is based on DCF (required rate of return: 6.25%, growth: 1%).
  • SingTel's share price has rebounded 7% ytd, trading at mean EV/EBITDA of 13x, well reflecting heightened competition in the consumer space in Singapore.
  • Entry price: S$3.00.

Source: UOB Kay Hian Research - 27 Sep 2019

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